The other student loan problem: too little debt

By Justin Pope
Associated Press

Published: Sunday, Nov. 27 2011 12:00 a.m. MST

In this photo taken Nov. 16, 2011, Jesse Yeh poses on the University of California campus with the Occupy Cal encampment at Sproul Plaza in the background in Berkeley, Calif. All those college students buried in debt you keep hearing about? Yeh will do just about anything to make sure he’s not one of them. He uses the University of California-Berkeley library instead of buying textbooks. He scrounges for free food and campus events and occasionally skips meals. (Eric Risberg, Associated Press)

LONG BEACH, Calif. — Jesse Yeh uses the University of California-Berkeley library instead of buying textbooks. He scrounges for free food at campus events and occasionally skips meals. He's stopped exercising and sleeps five to six hours per night so he can take 21 credits — a course load so heavy he had to get special permission from a dean.

The only thing he won't do: take out a student loan.

"I see a lot of my friends who took out student loans, then they graduated and because of the economy right now they still couldn't find a job," said the third-year student, whose parents both lost their jobs in 2009 and who grew up in the boom-and-bust town of Victorville, Calif., on a block with several houses in foreclosure. "The debt burden is really heavy on them."

Even as college prices and average student loan debt rise, educators in some sectors of higher education report they're also seeing plenty of students like Yeh. After watching debt cause widespread damage in their families and communities, they're determined to avoid loans no matter what.

In this photo taken Nov. 16, 2011, Jesse Yeh looks out on the Occupy Cal encampment at Sproul Plaza on the University of California campus in Berkeley, Calif. He will do just about anything to avoid debt. Yeh uses the university's library instead of buying textbooks. He scrounges for free food and campus events and occasionally skips meals. (Eric Risberg, Associated Press)

What's surprising is this: Educators aren't sure that's always such a good thing.

Students who take extreme steps to avoid debt at all costs, they say, may get stuck with something much more financially damaging than moderate student loan debt. They may not wind up with a college degree.

To pay for college and minimize borrowing, students are working longer hours at jobs and taking fewer credits. They're less likely to enroll full-time. They're living at home. They're "trading down" to less selective institutions with lower prices, and heading first to cheaper community colleges with plans to transfer later to four-year schools.

Those may sound like money-savers, but in fact each is a well-documented risk factor that makes students less likely to graduate.

"There's been such attention on student debt being unmanageable that current students have internalized that," said Deborah Santiago, co-founder and vice president for policy research at the group Excelencia in Education, a nonprofit advocacy group. In fact, "If you can take out a little bit of loan you're more likely to complete. If you can go to a more selective institution that gives you more resources and support, you're more likely to complete."

In this photo taken Nov. 16, 2011, Jesse Yeh sits by a fountain on the University of California campus in Berkeley, Calif. He uses the university's library instead of buying textbooks. He scrounges for free food and campus events and occasionally skips meals. (Eric Risberg, Associated Press)

To be sure, educators can't help but admire the determination of students like Yeh; if that kind of responsibility was more common, the financial crisis might never have happened. And nobody blames students for being afraid amid a flurry of news about debt, like a recent analysis estimating the average debt burden for 2010 college graduates who borrowed was over $25,000, up 5 percent from the year before.

But getting almost no notice in recent reports was another stat: New borrowing nearly flattened out last year, according to the College Board, and actually declined on a per-student basis after accounting for inflation. Private borrowing (generally more dangerous to students) has dropped from about $24 billion in 2007-2008 to about $8 billion last year. A major factor is likely increased federal grant aid. But another may be students making more sacrifices to avoid loans.

What's the upside of borrowing? Federal data analyzed by Santiago's group and The Institute for Higher Education Policy (IHEP) in 2008 shows roughly 86 percent of students who borrow for college are able to attend full-time, compared to 70 percent of students who don't borrow. That matters because roughly 60 percent of full-time students receive a bachelor's degree within eight years, compared to 25 percent of part-time students.

In this photo taken Nov. 16, 2011, Jesse Yeh poses on the University of California campus in Berkeley, Calif. He uses the library instead of buying textbooks. Yeh scrounges for free food and campus events and occasionally skips meals. He will not take out a student loan. (Eric Risberg, Associated Press)

Other research, meanwhile, shows just 26 percent of students who enroll in a community college hoping eventually to earn a four-year bachelor's degree succeed within nine years. That compares to 50 percent starting at non-selective four-year colleges and 73 percent at selective schools.

The more selective school may have a higher price tag, and you may expect it will be harder. But in fact, even comparably qualified students are more likely to graduate from the more selective school, probably because such schools generally offer more financial aid and academic help.

Student debt aversion is most pronounced among Hispanics and Asians, who borrow at lower rates than whites despite having higher financial need. And it appears to have the greatest consequences for Hispanics and blacks.

Fifty-one percent of blacks who had financial need but decided not to borrow had left school within three years without a degree, compared to 39 percent of those who borrowed, the study by Excelencia and IHEP found. For Hispanics, 41 percent of non-borrowers had left, compared to 32 percent who borrowed.

In Hispanic immigrant populations, "aversion to borrowing stems from a lack of a banking relationship of any sort," said Santiago, who has studied debt aversion in the states along the Mexican border. "They tend to live in a cash economy, and (have) a very stringent determination to live within your means."

For Hispanics, she says, the issue isn't new. But more broadly, a new generation is arriving on campus whose financial education was forged almost entirely during the financial crisis and the wretched economy of the last four years.

"I think the foreclosure (crisis) is definitely something that is on my mind," said Yeh. He says he would borrow if it became absolutely necessary. He's doing OK academically, but acknowledges he used to have a few weeks to work on a paper; since upping his course load he typically bangs it out the day before. He's so busy he doesn't have time to cook and eats out regularly, even though that's more expensive.

At California community colleges, students don't usually need to borrow to pay tuition. But the decision affects how much they work outside class — and that affects their path through college.

Isaac Romero, 22, a third-year student at Long Beach City College, works a nearly 40-hour-per-week job with a workforce staffing company that has him on assignment at City Hall. He goes straight from there to class from roughly 4 until 9:40. Two bus rides later he gets home, often around midnight. Weekends are for homework.

He hopes to transfer next year, earn a bachelor's degree and then attend graduate school. Someday he wants to teach at LBCC. He figures he'll eventually have to borrow but wants to keep his debt as low as possible. So he ignores the loan solicitations that flood his mailbox.

"Life would be a little more comfortable if I did take some loans," admits Romero. "I might have a car. I wouldn't have to take the bus for two hours." But, he remembers his father — both parents are now deceased — agonizing over bills. Several friends have had cars repossessed.

"I just don't want to go through that," he said.

Eloy Oakley, the president of LBCC, says he understands the source of debt aversion.

"The predatory lending we've had from private lenders, credit card companies, has scared students," Oakley said. "I think they have a conception that all debt is bad. They're concerned about that and rightfully so."

But it's so important to move students through community college expeditiously, he says, that he's concluded debt aversion is a more dangerous problem overall than student debt.

"The longer they're in school, the more opportunity they have to be distracted by life events, jobs, families, situations that change in their own families," says Oakley, whose student body is 41 percent Hispanic and 16 percent Asian. "If we can minimize those exit points and shorten their time to degree, that's much more advantageous to them."

The solution is helping students better understand the complexities of financial aid: the difference between government and private loans, how much debt is manageable, the likely returns on various degrees and majors.

"It's hard to get a nuanced message to students so they can act prudently and get their education," Santiago said. "We have to show there's a level of financial aid and loan amount that's reasonable."